Infosys results: Experts see weak Q3 for software major

As the latest earnings season kicks in with Infosys December quarter results on Friday, the street expects the IT major along with the other top IT players to report moderate revenue growth for a seasonally weak third quarter of FY14.

Analyst estimates Infosys to report a sequential dollar revenue growth of 1.5% to 2.5%. Experts seem united in their view that Infosys is likely to upgrade FY14 revenue growth guidance to 11.5%-12% from the current range 9%-10% which it upgraded at the time of announcing Q2 numbers. The Ebitda or operating margin for the quarter is seen improving in the range of 80 to 200 basis points q-o-q due to efficient cost realisation and an absence of visa-related cost which had impacted the margin in the September quarter.

As per Kotak Institutional Equities, Infosys is likely to report a weak q-o-q revenue growth of 1.8% with a 1.4% constant currency growth and 40 basis points of cross currency benefits. Operating margins may expand 110 bps as benefits of aggressive cost-rationalisation measures begin to reflect in performance, it added.

After reporting a better-than expected sequential sales growth in dollar terms in both June (2.7%) and September (3.8%) quarters, experts anticipate Infosys to further revise revenue guidance for the fiscal to up to 12%. According to Societe Generale, after the 15% rally in the stock over last three months, investor expectations are already building in an upward revision to a full-year guidance and the share might react negatively if company maintains the current guidance. It sees Infosys raising fiscal revenue guidance to 11-12% on back of a strong growth in North America.

The consensus on the guidance upgrade notwithstanding, analysts seem divided on their stance on the companys operating margins for the next one year as well the companys ability to demonstrate a turnaround in operations amid sustained exits of top executives in last six months.

For instance, Barclays pegs its FY15 EPS (earnings per share) estimates at 15% and sees a margin recovery of about 380 bps over the next eight quarters due to improved utilisation and tightly controlled onsite costs.

HSBC recently assigned overweight rating on the stock, citing upside on margin, focus on its bread and butter ADM (Application Development and Maintenance) business, relative stability in management in the future and inexpensive valuations.

For most part of the last two years, the stock has traded at a steep discount to TCS valuations. Even after gaining 50% in 2013, Infosys traded at 19 times its FY14 expected earnings while TCS traded at an earning multiple of 24, as on Thursday.

As per Credit Suisse, although Infosys is the most debated stock getting into 2014, the brokerage house is not constructive due to concerns on some of the softermanagement issue.

Ambit Capital maintains sell rating and believes Infosys will continue to lack a clear strategy and market appears to have discounted a turnaround in Infosys after return of founder Narayana Murthy as the executive chairman.